BILL DRAFT 2005-RBxz-36B: Video Service Competition Act BILL ANALYSIS Committee: Revenue Laws Study Committee Date: May 2, 2006 Introduced by: Summary by: Cindy Avrette Version: Draft Committee Counsel SUMMARY: This bill would provide equal taxation of video programming services regardless of how the service is delivered and it would replace locally negotiated franchises of cable service provided over a cable system with a State-issued franchise. The bill would become effective January 1, 2007. CURRENT LAW: North Carolina began taxing communication services when the technologies enabling the services were separate and distinct technologies and the providers of the services were separate and distinct taxpayers. Over the past several years, the technology used to provide these services has converged so that the line between the services is no longer separate and distinct. The Current Operations and Capital Improvements Appropriations Act of 2005 directed the Revenue Laws Study Committee to study the equity of taxation of providers of cable service, direct-to-home satellite service, satellite digital audio radio service, video programming service, and data service. The Revenue Laws Study Committee spent a considerable amount of time on this issue. 1 The Committee found that the State taxes these services based upon who provides the service rather than the service itself. Despite the General Assembly s repeated attempts to provide tax equity among these providers, it is debatable whether that has been accomplished: The State imposes a 7% State sales tax on telecommunication services and it earmark a percentage of the revenues to cities. The amount each city receives is based upon a per capita statutory formula. State law prohibits counties and cities from imposing local taxes on this service. The State imposes a 7% State sales tax on direct-to-home satellite service. Federal law prohibits a local tax on this service and it prohibits local regulation of this service. The tax revenue is not shared with local governments. The State imposes a 4.5% State sales tax and a 2.5% local sales tax on digital audio radio service. The State imposes a 7% State sales tax on cable services, with a credit equal to the amount of local franchise tax paid on the service. Counties and cities may impose a local franchise tax on this service; the tax may not exceed 5% of gross receipts. Cable service has been subject to local regulation since 1973. The local regulation of cable services varies from county to county and from city to city, depending on the terms of the locally negotiated agreements. The definition of 'gross receipts' may also vary from agreement to agreement. The cable boxes rented to customers is subject to the State and local sales tax. The gross receipts from the rental of these boxes may also be included in the company's gross receipts for local franchise tax purposes, depending upon how the term is defined in the local agreement. 1 The Revenue Laws Study Committee staff met separately with representatives of the cable industry, the telephone industry, the cable administrators, and the counties and cities. It also held a series of four meetings with the all the affected parties and solicited comments from the parties on numerous occasions. The staff prepared a survey given to all the local governments in the State to determine their franchise fee collections and other nonmonetary contributions received in accordance with their cable franchise agreements.
Page 2 The Revenue Laws Study Committee acknowledged that the method of taxation should not provide one provider of a service with a competitive advantage over another. The Committee expressed a goal to establish a method of taxation that applies equally to the same service, regardless of who provides it. The Committee established the following principles: Equal taxation of the same service. A tax system that is easy to administer. A tax and regulatory system that do not impede competition. Equal compensation to cities for the use of their public rights-of-way. PEG channels service a public purpose and should be supported. Based upon those principles, it desired a proposal that met the following goals: Applies the principles stated above. Contains no tax or fee increase. Preserves local government revenue stream. Promotes competition in the marketplace. Promotes deployment of broadband as a basic communication tool. North Carolina is not alone in grappling with the issue of how to tax and regulate telecommunications and video programming services. Congress as well as other states is considering legislation on this issue. At this time, at least three states have enacted legislation changing the regulation and taxation of telecommunications and video programming services and at least eight other states have legislation pending on the issue. BILL ANALYSIS: Legislative Proposal #1, Video Service Competition Act, establishes uniform taxes for video programming services and seeks to promote consumer choice. It establishes equal taxation of the same service by applying the State 7% sales tax to all video programming services, repealing the local authority to impose a local franchise tax, and repealing the sales tax credit allowed to cable companies for local franchise tax paid. It preserves the local government revenue stream by distributing part of the sales tax revenues from telecommunications and video programming services to the counties and cities. The distribution formula is based upon the amount of cable franchise tax revenue received in fiscal year 2005-2006 plus any subscriber fees received that year. The proposal promotes competition by providing a State franchise process, in lieu of the current locally negotiated franchise agreements. It seeks to ensure competitive neutrality by allowing cable providers to opt-out of existing local agreements when one or more households in the franchise area may be served by both the existing provider and the holder of a State-issued franchise. The proposal specifically prohibits discrimination in the provision of video programming services and declares a violation of this law to be an unfair or deceptive trade practice. The holder of a State-issued franchise must comply with customer service and emergency alert requirements established by the Federal Communications Commission. The proposal designates the Consumer Protection Division of the Attorney General's Office as the State agency to receive customer complaints regarding video programming services. The proposal preserves local regulation of public rights-of-way and provides for PEG channel support and growth. In addition to including the per subscriber revenues in the distribution base to local governments, the proposal provides up to $2 million for supplemental PEG support. The proposal
Page 3 provides that existing franchise agreements will determine the number, service tier placement, and transmission quality required of PEG channels under a State-issued franchise. In the absence of an existing agreement, the number of PEG channels a county or city may have is determined by the area's population. A local entity may acquire additional PEG channels, with the maximum number of channels set at seven. The proposal also requires cable service providers to provide free basic service to local public buildings. Section-by-section analysis of the proposal: Section 1 of the proposal replaces the authorization to counties and cities to award a franchise for cable service with a State franchising authority, effective January 1, 2007. The proposal provides that a county or city may not award or renew a franchise for cable service after this date. The proposal designates the North Carolina Utilities Commission as the exclusive franchising authority in the State for cable service provided over a cable system. The terms 'cable service' and 'cable system' are defined by federal law. The proposal would require the franchising of cable service that is required to be franchised under federal law. The proposal does not expand the services that need to be franchised beyond those currently required to be franchised under federal law. State issued franchise. The State franchise process is one of notice, not regulation. To receive a Stateissued franchise, a person must file a notice of service with the Utilities Commission. A person who files a notice of service with the Commission must begin providing cable service within 120 days after the notice is filed. If service is not provided within this period, the notice of service terminates 130 days after it was filed. The notice of service must include the applicant's name and principal place of business, a description and map of the area to be served, a list of each county and city in which the described service area is located, and a schedule indicating when service is expected to be offered in part or all of the service area. Report of initial service. Once cable service is provided, the holder of a State-issued franchise must file a report of initial service with the Commission. The report of initial service must include the effective date of the notice of service for that area, a description and map of the service area, and a statement that cable service has begun in the service area. The holder of a State-issued franchise must also file an annual service report on or before July 15 of each year. The annual service report must include all of the following: the effective date of a notice of service for that area, a description and map of the service area, the approximate number of households in the service area, a description and map of the households passed in the service area as of July 1, the percentage of households passed in the service area as of July 1, the percentage of households passed in the service area as of July 1 of any preceding year for which a report was required, and a schedule indicating when service is expected to be offered in part or all of the service area, to the extent the schedule differs from one included in the notice of service or in a report previously submitted, and an explanation of the reason for the new schedule. Existing agreements. The State franchising authority does not affect a local franchise agreement that was awarded by a county or city and is in effect on January 1, 2007, except as follows: Effective January 1, 2007, gross revenue used to calculate the payment of a local franchise tax does not include gross receipts from cable service subject to the State sales tax. A local franchise agreement may be terminated when a report of initial service indicates that one or more households in the franchise area of the existing agreement are passed by both the cable provider under the existing agreement and the holder of a State-issued franchise. Termination of existing agreements. To terminate an existing agreement, a cable service provider must file a notice of termination with the affected county or city and file a notice of service with the Utilities
Page 4 Commission. A notice of termination becomes effective at the end of a calendar quarter that is at least 30 days after the notice of termination is filed with the affected county or city. A termination of an existing agreement ends the obligations under the agreement as of the effective date of the termination. Service standards and requirements. The proposal specifically prohibits discrimination in the provision of the cable service. A violation of the law is considered an unfair and deceptive trade practice. In determining whether a cable service provider has violated the law, the following factors may be considered: the length of time since the provider filed the notice of service for the area, the cost of providing service to an area, technological impediments to providing service to an area, and the inability to obtain access to property required to provide service to an area. A cable service provider must comply with the customer service requirements and emergency alert requirements established by the Federal Communications Commission. The Consumer Protection Agency of the Attorney General's Office is designated as the State agency to receive and respond to consumer complaints. PEG channels. The proposal requires a cable service provider operating under a State-issued franchise to include the transmission of PEG channels. A county or city may make a written request for PEG channel capacity and the cable service provider must provide the requested capacity within 120 days after it receives the request. If the area is included in both the franchise area of an existing agreement and the service area of a State-issued franchise, then the terms of the existing agreement as of the filing date of the notice of service determine the number, service tier placement, and transmission quality of the initial PEG channels required under the State-issued franchise. If no existing agreement includes any part of the service area of a State-issued franchise, then the number of PEG channels required under the State-issued franchise depends upon the population of the city in which part or all of the service area is located. If the city's population is at least 50,000, the provider must provide up to three PEG channels. If the city's population is less than 50,000, the provider must provide up to two PEG channels. The PEG channels must be placed on a basic service tier and the transmission quality must be equivalent to those of the closest city covered by an existing agreement. The maximum number of PEG channels a cable service provider must provide to a county or city is seven. If a county or city does not have seven PEG channels, including the initial PEG channels, it may request additional channels. The additional channels may be provided on any service tier and the transmission quality of the additional channels must be at least equivalent to the transmission quality of the other channels provided. The PEG channels operated by a county or city must meet the following programming requirements in order for the county or city to obtain additional channels: All of the PEG channels must have scheduled programming for at least 80% of the time for at least 8 hours a day. The programming content of each PEG channel must not repeat more than 15% of the programming content on any of the other PEG channels. No more than 15% of the programming content on any PEG channel may be character-generated programming. A cable service provider is responsible only for the transmission of a PEG channel. A county or city to which the PEG channel is provided is responsible for the operation and content of the channel. Service to public buildings. At the written request of a county or city, a cable service provider operating under a State-issued franchise must provide cable service without charge to a public building located within 125 feet of the provider's cable system. The required service is the basic, or lowest-priced,
Page 5 service the provider offers to customers. Only one service outlet is required for a building. A public building is a building used as a public school, a charter school, a library, or a function of the county or city. Sections 2 and 3 of the proposal would apply the State sales tax equally to all video programming services, regardless of who provides the service. Section 2 defines the term 'video programming' to be programming provided by, or generally considered comparable to programming provided by, a television broadcast station, regardless of the method of delivery. The term is broader than 'cable service provided over a cable system'. It would include cable services offered over private rights-of-way as well as those offered over public rights-of-way. Section 3 imposes the State's 7% sales tax on the gross receipts derived from providing video programming to a subscriber in this State. 2 Sections 4 through 6 of the proposal would make technical and conforming changes to the provisions governing bundled transactions. Sections 7 and 8 of the proposal would distribute a share of the sales tax revenues imposed on video programming to counties and cities. The revenue distributed is local revenue, not a State expenditure. Therefore, the Governor may not reduce or withhold the distribution. Section 7 would increase the amount of the sales tax revenue derived from telecommunication services distributed to cities and counties. Section 8 would distribute the following portion of the gross receipts derived from video programming to counties and cities: 22.61% of the net proceeds collected on video programming, other than on direct-to-home services and 37% of the net proceeds collected on direct-tohome satellite service. 3 The distributions would be made quarterly. The amount distributed would be allocated as follows: An amount, not to exceed $2,000,000 a year, would be distributed as supplement PEG channel support to counties and cities with qualifying PEG channels. The amount per qualifying PEG channel would be $16,000. A county or city could not receive supplemental PEG channel support for more than three PEG channels. The amount distributed to a county or city as supplemental PEG channel support must be used by it for the operation and support of PEG channels. The remainder of the revenues to be distributed would be allocated between the counties and cities as follows: o The share of a county that did not impose a cable franchise tax before January 1, 2007, would be $1 times the most recent annual population estimate for that county. The population of the county would be the population of its unincorporated areas plus the population of an ineligible city in the county. o The share of a city that did not impose a cable franchise tax before January 1, 2007, would be $2 times the most recent annual population estimate for that city. o The share of a county or city that did impose a cable franchise tax before January 1, 2007, would be its proportionate share of the remaining amount to be distributed to all counties and cities that imposed a cable franchise tax before January 1, 2007. A county's or city's proportionate share would be the amount of cable franchise tax revenue it 2 Although the term video programming includes broadcast services, the provision of these services would not be taxed unless the provider sells the service to subscribers and thus realizes gross receipts from the provision of the services. 3 This percentage distribution from satellite TV services mirrors the 2.5% local sales tax on satellite radio services.
Page 6 received in fiscal year 05-06 plus the amount of a subscriber fee imposed in fiscal year 05-06 compared to the amount of cable franchise tax revenue and subscriber fee revenue all counties and cities received in that fiscal year. For subsequent fiscal years, the amount each county or city receives would be adjusted based upon its percentage change in population. Section 9 would repeal the credit against the State sales tax on cable services for local franchise tax paid since the local franchise tax is repealed in Section 13. Section 10 would repeal the county's authority to franchise cable television services. Section 11 would repeal the county's authority to impose a franchise tax on cable services. Section 12 would prohibit a city from imposing a tax on video programming services. Section 13 would repeal the city's authority to impose a franchise tax on cable services. Section 14 would repeal the city's authority to franchise cable television services. Section 15 would provide that an award of a State-issued franchise does not affect a determination of whether video programming provided by the holder of the franchise is considered cable service provided over a cable system under federal law. Section 16 would provide that the provisions of this act are severable. Section 17 would direct the Revenue Laws Study Committee to review the effects of this act on competition in video programming services, the number of cable service subscribers, the price of cable service by service tier, the technology used to deliver the service, and the deployment of broadband in the State. The Committee would see if any changes to the law are necessary and would report its findings and recommendations to the 2009 General Assembly.